The bailout of the Big Three U.S. car companies – General Motors, Ford, and Chrysler – cannot be expected to receive the same public support as did the last bailout.  People rely on a secure financial system to engage in transactions and maintain employment.  Even if they did not understand the underpinnings of the collapse, they appreciated the necessity of intervention.   The Big Three are quite different, however, because they supply non-necessary goods, given the availability of alternative transportation. If Congress bails out individual, goods-supplying firms, people reasonably may feel that Congress might as well launch its own “American Idol” television show to find the next struggling industry to bail out.  Furthermore, it is difficult to imagine that a bailout is the solution per se to the automobile companies. At best, the bailout will help them stay afloat for the next five to ten years; but, if they do not change their strategies, it will be money wasted. Americans are beginning to voice their frustration that the Big Three have been stuck in their ways for years and needed to change their strategic focus toward building products in high demand, like ecologically-friendly cars, to prevent this disaster.  In light of this developing general opinion, the bailout will very likely have a severely negative public relations impact on American consumers.  One compelling argument for Congress’s bailout of the Big Three is that it will prevent the fall of one of the significant symbols of American soft power. Professor Joseph Nye defines soft power as a nation’s ability to influence others through its ideas, culture, and way of life. The automobile industry represents a pillar of the American soft power. If the Big Three were to disappear, part of the visible U.S. culture around the world would follow suit. While it is an initially attractive argument, that line of reasoning leaves no end in sight for future bailouts.

The alternative proposal to the bailout is to force the Big Three to declare bankruptcy, similar to what K-Mart did in 2002.  Those in favor of the alternative praise the benefits of refinancing and the capitalistic cultural of survival-of-the-fittest.  Bankruptcy is a more viable solution than the bailout because it does not involve as much public money and gives the companies much-needed time to restructure themselves.  In addition, it allows the companies to renegotiate their contracts and, perhaps, regain some strength in the market.  There are compelling concerns, however, that refinancing will not be a realistic option for the automobile companies, given the current financial crisis.  Furthermore, opponents argue, there are too many American workers employed directly or indirectly by the Big Three to permit the risk of collapse.

The current framing of the automobile industry problem — bailout or bankruptcy — leaves out a third approach that largely avoids the concerns voiced over the first two options.  As stressful as the automobile crisis is, it is not a new problem to international markets.  Take Renault, a French car company, for example.  Instead of pleading for government aid when it faced collapse in the late 1990s, Renault fostered an alliance with the Asian car company, Nissan.  During that time, the world market for automobiles was witnessing its worst recession in 20 years, but Japanese competitors had a major cost advantage compared to Renault. Despite its financial mess, Renault had the significant advantage of major brand recognition in Europe. Together, Renault and Nissan focused on complementary markets (Renault in Europe, Nissan in the U.S and Asia), shared research and development efforts to more efficiently improve their cars, and in the long run decreased their costs through streamlining European car production. Since then, Renault Nissan has been very successful. Importantly, Renault managed to keep its brand alive as uniquely French. The success of this alliance is that Renault remained in business as a symbol of the French automobile.

There is ample evidence that Asian automobile firms are interested in acquiring the Big Three. In 2006, Renault-Nissan approached General Motors to create an alliance similar to the relationship they had developed in the 1990s. But it was quickly turned down by General Motors. In 2000, Mitsubishi and Daimler Chrysler tried to develop an alliance, but it failed due to both firms’ individual financial difficulties.  The Big Three no longer have the luxury of resisting foreign alliances without a coherent explanation to the American people.  By offering only two options of bailout or bankruptcy, the Big Three and Congress are misleading the American public into believing that successful compromises could not be achieved.  If the Big Three want to stay in business with the long-lasting support of the American people, they need to explain why they refuse to develop international alliances.

The Emergency Economic Stabilization Act of 2008, more commonly referred to as the “bailout plan,” has caused significant debate, suspicion, and anger among the American people.  As giant companies cried out for help in the face of imminent collapse, Congress wrote a $700 billion check ostensibly to rescue the economy from the alleged devastation that would otherwise have occurred.  The economy, however, continues to struggle.  The New York Times reports today that unemployment in the United States has reached a 14-year high, rising to 6.5 percent.  The stock market continues to bounce uncontrollably, which does nothing to help restore consumer confidence.  It has been widely reported that the bailout money is not being used to restore the economy, but rather, for executive bonuses.  Time magazine reported that executives of those firms receiving bailout funds can expect to earn bonuses worth about “15 times the income of the average American household.”  The American people, watching prices rise, job opportunities fall, and their retirement funds slip away, are asking themselves what went wrong.

One of the main arguments in favor of the bailout package was that the collapse of some companies, notably AIG, would have too much of a negative impact on the economy.  American citizens were cautioned that the economy would crumble if these companies weren’t propped up.  Perhaps that is true.  The question, however, is: Why were these companies allowed to become so singularly powerful in our economy? If a company has too much power in its own market, the government intervenes through antitrust law to rein it back from excessive power.  There is a vital, relevant market that appears to have been neglected by the antitrust movement:  The Public Market.

The United States government is familiar with protecting Americans from unfair and corrupt business practices, largely through antitrust law.  Antitrust law, initiated by the Sherman Act in 1890, protects American consumers and competitive firms from the harm that arises out of anti-competitive activities, such as price fixing, cartels, and predatory pricing.  The Act was supplemented by the 1914 Clayton Antitrust Act, which granted the government the authority to intervene earlier to prevent such illegal behavior. The spirit of the Sherman and Clayton Acts is rooted in the fact that consumers are often coerced into paying higher prices and competitive firms generally struggle to stay in business when monopolies exist.  The Antitrust Division of the U.S. Attorney General’s Office and the Federal Trade Commission (FTC) are responsible for monitoring signs and symptoms of anti-competition in the market.  One of the ways in which the Attorney General and the FTC have measured unfair business practices since 1985 is through a market share analysis:  If a company has too high a percentage of the relevant market, the Department of Justice is responsible for investigating its excessive power and punishing the company for it.

It is time for the United States government to enact similar legislation with its eye towards the Public Market, which we shall define as any market with significant public involvement.  Significant public involvement can be established in the following ways:  (1) significant financial investment by individuals, (2) significant repercussions to individual financial investment in the event of collapse, and/or (3) significant ties to other firms that have significant investment by individuals.  Significance should be understood as an unreasonably risky level.  The legislature should establish a threshold, past which significant public involvement is deemed unacceptable and must be hedged in.  If and when the FTC and Attorney General report significant public involvement, the accused firm must post bond to insure the public against any negative repercussions as it corrects itself.  An index, similar to the one used in antitrust law, must be established as a function of significant public involvement.  The index will be a function of the firm’s aggregate public involvement as a fraction of United States Gross Domestic Product.  The bond required for those firms with significant public involvement will be a function of each firm’s involvement.  The bonds will only be reimbursed if the firm reduces its public involvement without damage to the economy.  Through such legislature, the United States government would achieve both short-term and long-term goals necessary to revitalize the economy:

(1) Improve consumer confidence;

(2) Increase transparency;

(3) Increase firm responsibility for harming consumers; and

(4) Minimize the need for a similar bailout in the future.

Of course, there is some responsibility on the part of consumers for the economic crisis in which we find ourselves.  To minimize the future risk of poor individual credit decisions, we recommend Credit Licenses, similar to drivers’ licenses:  If a consumer wants a loan or a credit card, she must take a class and, later, a government-administered exam to demonstrate her competence at making significant financial decisions.  In particular, each consumer must be able to comprehend the details of any consumer credit agreement and must be able to calculate the financial effect of revolving credit.  If the consumer credit agreements are excessively complicated such that a consumer with a high school diploma cannot comprehend them, the government must enact regulation to improve transparency.

Financial analysts, politicians, and reporters have described the current crisis in such a complicated, complex fashion that American consumers may understandably feel disempowered.  It is important to remember, however, that the complexity of an industry must not protect it from inquisition.  Consider the case of the physician:  If a physician makes a mistake on a patient – no matter how technical or complex the procedure – he may be sued for malpractice and may pay damages.  In the case of the current economic crisis, there were, simply put, traders and analysts lacking the competency and wisdom to understand the repercussions of their mistakes.  When the economy was doing well, those mistakes were accepted or ignored.  But when the economy began to slip, the lacking abilities turned devastating.  The financial institutions have a responsibility to their shareholders and consumers to make appropriate staffing decisions.  At the end of the day, regardless of whether the financial institutions could accurately predict the damage they would cause the economy, economists and lawyers will be prepared to estimate the damages now.

This article was written by Dr. Sebastien Gay and Nadia Nasser-Ghodsi.  Nadia is a 2011 J.D. Candidate at the University of Chicago Law School.